Home Country Institutions Research Articles

Institutional voids and innovation governance: A conceptual exposition of the open versus closed architecture choice

AbstractThe choice of open versus closed innovation is shaped by the interplay between firms' analytical orientation and the institutional conditions within firms' operating environments. Whereas there is a plethora of research about the antecedents of innovation performance, there is a lack of understanding about the factors affecting and influencing innovation governance. Regulatory, normative, and cognitive institutional voids have differential impacts on the choice of open versus closed innovation. Firms' analytical orientation, political connections, and collaborating partners' home country institutions moderate the effect of institutional voids on innovation governance.

Home Country Institutional Context and Entrepreneurial Internationalization: The Significance of Human Capital Attributes

The global economy involves enormous internationalization activities that provide untapped opportunities for entrepreneurs and businesses. This study sets out to improve the understanding of the role of the home country human capital on entrepreneurial internationalization. To advance this understanding, we conducted an analysis of data from 28 European countries using structural equation modeling (SEM) with partial least squares (PLS). The result of an empirical analysis revealed that the entrepreneurial intentions of the country’s non-entrepreneurs has a positive and significant impact on effective business creation and the latter consequently has a positive and significant impact on the level of internationalization. Also, our findings indicate that the level of education has a negative impact on entrepreneurial readiness/awareness.

The influence of home-country institutions on servitization

PurposeThe purpose of this paper is to explore how home-country institutions influence firms’ servitization decisions. Existing studies have mostly neglected differences across countries and implicitly assumed the servitization process and drivers are homogenous across national institutional environments. The authors challenge this assumption.Design/methodology/approachUsing case-based research, the authors explored the influence of formal institutions of the product, financial and labor markets on the servitization of two firms operating in a developed country and two in an emerging country.FindingsThe absence of robust home-country institutions did not necessarily hinder the servitization process. On the contrary, firms servitizate to overcome the difficulties posed by these institutional voids. The flexibility associated with service offerings enables firms to create viable alternatives to cope with taxes, lack of infrastructure and qualified labor force.Originality/valueThese outcomes contribute to the servitization literature, which has mainly focused on single-country studies and takes for granted the institutional differences between countries. The findings suggest future studies need to consider how and, to what extent, the country where the company is located influences servitization strategies and processes. Such reflections will improve the inferences made concerning firms’ servitization. For practitioners, the results suggest that the move into the provision of services can be a fruitful strategy to overcome the difficulties faced in emerging markets.

Internationalization of SMEs from emerging markets: An institutional escape perspective

Conceptualized as an escape response to the misalignment between firm needs and home country institutions, institutional escapism appears to be ignored in the research on emerging market firms (EMFs) and particularly small medium-sized enterprises (SMEs). As an integral part of institutional theory, however, the escape view could be especially applicable to study the internationalization of SMEs from emerging markets. To fill the research gap, we develop a theoretical framework of institutional escapism with institutional arbitrage as a functioning mechanism. Based on an empirical analysis of 319 private SMEs in China, we find that SMEs tend to escape to a host country with institutions different from their home country and choose an entry mode of low-resource commitment, revealing a solid institutional arbitrage logic by partially escaping from domestic market. We also demonstrate that such choice of location and entry mode does not change with economic development of a host country. By explicitly showing that escape orientation and arbitrage logic are not necessarily independent or as separate as they were treated in the literature, our integrating approach provides a relatively fuller picture of the internationalization of EMFs and especially Chinese SMEs.

What are migrants willing to pay for better home country institutions?

We conduct a contingent valuation investigation of the preference of international migrants for better home country institutional quality. Our study uses contingent valuation questions in a survey of 1.6% of Vietnamese adult migrants living in New Zealand (NZ) in 2016 to establish the compensating differentials that make those migrants indifferent between residing in NZ and returning to Viet Nam (VN) in hypothetical scenarios. We find that the estimated willingness to pay for an incremental unit improvement in institutional quality in VN is, on average, about NZD 80 per week (approximately 33% of the average weekly wage in VN in PPP terms for the same period), and positively associated with the respondents’ age and the perceived importance of institutional quality in VN to their repatriation intentions. This study underscores the importance of institutional quality to migration decisions by showing that migrants are willing to trade-off part of their regular income for better home country institutional quality.

Employee Relations at Asian Subsidiaries in Hungary

Asian foreign direct investment is substantial in Hungary in regional comparison. Multinationals from China, India, Japan, and Korea are important investors in the Hungarian economy. The main aim of this article is to describe how home and host country institutions and business and management culture influence the operation of the companies in question, first of all in the various areas of human resource management. In the analysis, we rely mainly on the Varieties-of-Capitalism approach, given its emphasis on the organizational and related cultural differences that result in different types of capitalisms in the world economy. The article is based on company interviews conducted with the representatives of seven Asian subsidiaries in Hungary (1–10 interviews per company) that are operational in the automotive and/or electronics industry. Our conclusion is that management and labor relations in these companies evolve under the influence and through the interaction of related home and host country business culture, thus they contain elements of both. However, we found the clear dominance of host country impacts, which has become more pronounced over time.

Home Country Institutions and Exporting Strategy: A Multi-Country Analysis

Home Country Institutions and Exporting Strategy: A Multi-Country Analysis

Earnings Management in Domestic and Foreign IPOs in the United States: Do Home Country Institutions Matter?

Using a large sample of domestic and foreign IPOs in the US, we investigate how threats of enforcement by the Securities and Exchange Commission (SEC) and private litigation influence earnings management in IPO prospectuses. We propose that perceptions of foreign institutions may influence SEC enforcement action and private litigation. We provide evidence that enforcement and litigation threats are negatively related to the strength of legal institutions in the foreign IPO’s country of origin. We find earnings management is more pronounced in foreign IPOs from countries with strong legal institutions. We further explore whether earnings management is priced in the IPO market and find no relation between IPO proceeds and earnings management. Our results are consistent with upward earnings management as in Stein (1989), the magnitude of which is reduced when the anticipated cost of enforcement and litigation is higher. Collectively, our results cast doubt on the validity of the bonding hypothesis.

M&A deals completion and abandonment by Russian MNE

PurposeThe purpose of this paper is to reveal how the host and the home countries’ formal institutions may affect mergers and acquisitions (M&A) abandonment by Russian multinational enterprises (MNEs), and how MNE industry can influence the results. The second objective of the study is to have a separate look at the negative experience, and to uncover its influence on M&A deal completion.Design/methodology/approachIn the study, a sample of 446 international M&A deals initiated by Russian MNEs in the period of 2000–2014 is empirically tested by means of logistic regression analysis.FindingsThe empirical analysis indicates that better business environment in the host country is crucially important whereas development of business freedom at home may make the international M&A less attractive and increases the likelihood of M&A deal abandonment. Thus, the larger the institutional distance by this indicator the more likelihood the deal is completed. Contrary results are implied for property rights: the larger the distance between Russia and host country, the lower likelihood of M&A deal completion. Failure experience decreases the likelihood of acquisition completion whereas international experience increases.Research limitations/implicationsThe study has number of limitations: individual-level variables were not included in the model; and a limited number of factors were tested due to availability of data and moderate sample size.Practical implicationsThe study indicates that better development of business freedom and moderate property rights protection in the host country are the most favorable factors for an M&A deal completion. Russian policymakers should realize that development of property rights protection in Russia ensures success of MNEs abroad, and development of business freedom reduces the outflow of capital from the economy.Originality/valueThe paper makes several theoretical and practical contributions: it contributes to institutional international business literature, indicating in which particular cases institutional distance has positive or negative effect on M&A completion. It also contributes to organizational learning literature, confirming that failures inhibit learning, and firms tend to repeat previous mistakes. Finally, the paper widens the scarce research on Russian MNEs, and on the role of the home country institutions for MNE’s behavior abroad.

Between a Rock and a Hard Place: Developing Organizational and Institutional Fit in MNE Subsidiary Political Strategy in Contexts of Institutional Upheaval

Recent corporate political activities (CPA) studies applying the “fit paradigm” found that foreign subsidiaries’ political capabilities in emerging markets are shaped not just by host country- but also by home country institutions: Subsidiaries of multinational enterprises (MNEs) need to develop CPA that “fit” parent political capabilities. Yet, this literature neglects that this “organizational fit” requirement goes together with an “institutional fit” requirement between subsidiary CPA and the host institutional environment. Achieving this dual fit is particularly difficult in very volatile institutional host environments where the value of political capabilities changes rapidly. In such environments subsidiaries face a dilemma between the decreasing “institutional fit” of easily transferable capabilities and the lack of “organizational fit” of necessary “sticky,” local ones. To understand how firms deal with this dilemma, we develop a typology of political capabilities that takes into account their varying transferability/stickiness and their dynamic institutional contingency in the host country. Our empirical study of Hungary shows that MNEs even from institutionally very different economies can successfully transfer political capabilities to develop effective CPA in a radically volatile political environment. Yet, as political risk becomes discontinuous, this strategy may reach its limits.

Bending the Rules or Changing Them? MNE Responses to Institutional Challenges in Transition Economies

We investigate what determines a multinational enterprise’s (MNE) propensity to engage in lobbying and bribing in host countries where the overall institutional development for market exchanges is insufficient, and thus, their governance systems are relatively weak. We extend the current literature on institutional strategies by theorizing and showing the persistent and significant impacts of home country institutions on an MNE’s choice of influencing activities to address institutional constraints overseas. More specifically, our results demonstrate that the MNEs from a home country with a stronger governance system are less involved in bribery, but have a higher tendency to lobby in transition economy countries, which have been characterized by relatively weaker institutional development, particularly in the area of governance. This tendency still holds even when these MNEs rely more on the local market for sales. We draw theoretical and practical implications from these observations.

Political Status and Tax Haven Investment of Emerging Market Firms: Evidence from China

Tax haven investment has become an increasingly important topic in business ethics. Given the considerable tax haven investments from emerging market firms, understanding how home-country institutions shape their investments in tax havens is theoretically intriguing and practically crucial. By integrating resource dependence and institutional theories, we hypothesize the existence of a negative relationship between firms’ home-country political status and tax haven investment. State-owned enterprises (SOEs) controlled by the central government dominate the political hierarchy. Compared with other types of enterprises, central SOEs receive the strongest institutional support and are the most prone to institutional oversight, thereby exhibiting the weakest tendency to invest in tax havens. This top group is followed by SOEs controlled by local governments, politically connected private firms, and private firms without political connections. These groups exhibit an increasing tendency to invest in overseas tax havens. The empirical analysis of Chinese listed firms during 2003–2013 supports our hypotheses. This research contributes to the business ethics literature by identifying institutional drivers of overseas tax haven investment by emerging market firms, thereby adding to the ethical debate on international tax avoidance.

Home country institutions and export behaviour of SMEs from transition economies: the case of Russia

This study examines the relationship between home country institutional environment and export behaviour of small and medium-sized enterprises (SMEs) from transition economies. It is argued that perceived institutional challenges in home country may explain significant differences in exporting among firms. By focusing on Russia, as a context of transition economy, it is empirically tested how the perceived tax and financial barriers define export propensity of SMEs, and whether corruption concerns can play a role of a moderator and navigate firms' export activities. Data on 3136 Russian SMEs provide strong support for the effects of the perceived institutional dimensions on firms' propensity to export. The results offer a more fine-grained picture of institutional environment by contributing to the extant literature and show that the impact of home country institutions is dependent on the subjective perception which plays an important role in shaping export behaviour of Russian SMEs. The implications are discussed.

Home country institutions and export behaviour of SMEs from transition economies: the case of Russia

Home country institutions and export behaviour of SMEs from transition economies: the case of Russia

Earnings Management in Domestic and Foreign IPOs in the United States: Do Home Country Institutions Matter?

Using a large sample of domestic and foreign IPOs in the US, we investigate how threats of enforcement by the Securities and Exchange Commission (SEC) and private litigation influence earnings management in IPO prospectuses. We propose that perceptions of foreign institutions may influence SEC enforcement action and private litigation. We provide evidence that enforcement and litigation threats are negatively related to the strength of legal institutions in the foreign IPO’s country of origin. We find earnings management is more pronounced in foreign IPOs from countries with strong legal institutions. We further explore whether earnings management is priced in the IPO market and find no relation between IPO proceeds and earnings management. Our results are consistent with upward earnings management as in Stein (1989), the magnitude of which is reduced when the anticipated cost of enforcement and litigation is higher. Collectively, our results cast doubt on the validity of the bonding hypothesis.

Foreign direct investment comovement and home country institutions

We use a hand-collected dataset of firm-level foreign direct investment in China to examine the impact of home countries' institutional elements on the investment comovement between foreign and domestic firms. We find that foreign firms from countries with well-developed financial markets or a strong rule of law experience less comovement with Chinese domestic firms. Our evidence also suggests a contingency impact between the two channels of home country institutions; the capital markets effect exists only for foreign firms from countries with strong rule of law, whereas the rule-of-law effect holds only for firms from countries with well-developed financial markets. Finally, we show that firms from countries with better institutional quality exhibit greater investment efficiency than firms from countries with weaker institutions.

IFRS adoption in China and foreign institutional investments

We examine the effectiveness of China’s IFRS adoption from the perspective of an important set of financial report users, foreign institutional investors. We find that foreign institutional investment does not increase after China’s IFRS adoption, and some evidence that it actually declines, particularly among firms with weaker incentives to credibly implement IFRS, or with greater ability to manipulate IFRS’s fair value provisions. We also find that the association between earnings and returns generally declines after IFRS adoption, consistent with reduced earnings quality. In addition, we find that foreign institutional investors’ returns decrease after China’s IFRS adoption. Finally, the decline in foreign institutional investment is greater among investors from countries with weak institutions that have also adopted IFRS. Taken together, our evidence suggests that the weak institutional infrastructure in China’s transitional economy impairs IFRS’s intended goal of attracting institutional investment through improved financial reporting quality. Further, financial information users’ home country institutions and IFRS adoption experience affect the effectiveness of IFRS adoption.

SEC monitoring of foreign firms’ disclosures in the presence of foreign regulators

SEC comment letters indicate that the SEC has reviewed the firm’s filings and identified a disclosure issue. Using the existence of an SEC comment letter as a proxy for SEC monitoring, we document a negative association between the level of SEC monitoring of foreign firms and the strength of those foreign firms’ home-country institutions, consistent with the idea that the SEC implicitly shares its regulatory duties with international securities regulators. We find that foreign cross-listed firms are subject to lower monitoring intensity than foreign firms listed only on US exchanges, but do not find a statistically significant difference in monitoring between foreign firms listed only on US exchanges and US firms. These findings suggest that it is the presence of another regulator that drives the intensity of SEC monitoring. We also find that US investor holdings are positively associated with the level of SEC oversight, suggesting that the SEC focuses its resources on firms that pose a greater risk to US investors. Collectively, our analyses show that two countervailing forces drive the SEC’s choice to monitor foreign firms. On the one hand, the SEC reduces monitoring intensity when it can rely on the public and private enforcement institutions in the foreign firm’s home country. On the other hand, the SEC provides increased monitoring of certain foreign firms when investors on US exchanges have greater investment exposure in those firms.

How does home country bribery affect firms’ foreign market focus?

PurposeDrawing on the bribery literature, this paper aims to examine the effect of bribes paid in the home country on firms’ decision to internationalize through exports from transition economies. It also investigates whether the effect of home country bribery may vary from new ventures to established firms, and from those firms that operate in an environment with high to low informal competition.Design/methodology/approachThis paper tests several hypotheses using a panel data with fixed effects based on a sample of firms in transition economies from the Business Environment and Enterprise Performance Survey.FindingsFirst, home country bribery in transition economies can make domestic markets more lenient and dampen firms’ motivation to seek opportunities abroad. Second, new ventures have a higher motivation to focus on their domestic markets after paying bribes. Finally, despite the benefits accrued in the home country through bribery, firms that face a higher level of informal competition in the home country are more likely to seek opportunities abroad.Practical implicationsManagers in transition economies should consider their home country bribery activities in their evaluation of foreign market opportunities. Firms that use money to influence home country government officials, especially new ventures, are advised to have a more holistic view in evaluating foreign market opportunities so they will not miss out on new opportunities.Originality/valueThis paper advances literature on home country institutions and the research on firm global strategies. Moreover, it also highlights several contingencies that shape the effect of home country bribery on firms’ foreign market focus.

Earnings Management within Multinational Corporations

ABSTRACT Using a large sample of multinational corporations (MNCs), we examine the location of earnings management within the firm. We posit and find that MNCs manage their consolidated earnings through an orchestrated reporting strategy across subsidiaries over which they exert significant influence. Specifically, we find that headquarters' influence on subsidiary earnings management increases with the degree of subsidiary integration and the extent of earnings management opportunities. Most importantly, we provide evidence that MNCs exploit regulatory arbitrage opportunities arising from cross-country differences in institutional quality. We document that, in response to exogenous improvements in the quality of their home-country institutions, MNCs rebalance their reporting strategies by clustering earnings management in subsidiaries from countries with more lenient regulations. Taken together, our findings yield important insights on the drivers of earnings management location within the firm and highlight the need for better cross-country coordination in regulatory design. JEL Classifications: F23; G15; G34; G38; M41; M48.